If you've joined me for coffee, breakfast, or lunch you may have noticed that I most often suggest small, independent, locally-owned businesses. This is no knock on Starbucks or national chain restaurants - many do a great job, but what drives me as a business broker is supporting entrepreneurs - the ambitious few who take considerable risk to add value to others, and who are more directly tied to the community in which they operate. Did you know that according to the SBA, small businesses create 64% of net new jobs? November 30, 2013 is Small Business Saturday - a day, in particular, to honor and support small businesses with our pocket books.

I know many entrepreneurs feel like Charlie Brown: they attempt to kick the ball to the moon, but sometimes the ball gets pulled away, and they land flat on their backs (sometimes repeatedly). Yet, they pick themselves up, dust themselves off, and optimistically continue to pursue their dream.

This Thanksgiving season, I'm thankful for all of the entrepreneurs who have persistently taken risks to make the world a better place by creating value through the products and services they provide.

Back when I was getting my MBA, I also took a law school course on distressed companies, bankruptcy, and reorganizations. In the text book we used, there was a parable about valuation that I thought did a good job pointing out some of the various ways that valuation can be approached and some of the short comings of some methodologies. Here’s a link to the parable: The Old Man and The TreeOne of the takeaways is that there are a variety of ways of looking at value. Some are far more simplistic than others, and not every valuation technique is appropriate for every type of business. Still, as a business broker I see some strange price and value rationalizations. While many business sellers, buyers, CPAs, and business brokers like using a rule-of-thumb multiplier or market comparable approach for their ease and simplicity, often these are not very accurate approaches to estimating business value. So instead Codiligent business brokers tends to focus more on a discounted cash flow approach because it allows for greater consideration of a particular business' performance and unique risk factors.

Check out the following time-lapse video of Portland, Oregon. What does it have to do with business brokers, selling a business, or buying one? Well, nothing really - other than it's a great preview of the city that Codiligent business brokers operates from. While Codiligent is located in Portland, it has effectively provided business seller representation as far away as Virginia. If you live outside of Oregon, are contemplating selling your business, and are visiting Portland, let us know - we'd love to have the opportunity to get together with you during your visit. Even if you are not visiting feel free to give us a call to discuss your situation and learn about our success in achieving good business sale outcomes remotely (it does require us traveling to visit you - but our physical presence won't be required as often during the process as you may think).

While the rapidly approaching holiday season is a time of festivity, friends, and family, it can also be a very stressful time for entrepreneurs trying to meet year-end deadlines, dealing with a higher-than-normal level of absenteeism, and trying to accommodate inconveniently-timed family and social obligations.

One of Kim's points is also very appropriate for preparing for a business sale: "If you are not able to take a vacation, it means you have done a poor job as a manager. Your business should be able to run without you if you’ve done a good job at setting up systems and structures." If you are able to take a totally un-plugged 2-3 week vacation and come back to a business that's running as well, or better than when you left, business buyers will perceive your business to be far more attractive and valuable.

A market comparable approach to value usually involves looking at what similar businesses have sold for as a multiple of some measurement of financial performance like revenue or earnings before interest taxes depreciation and amortization (EBITDA), and then applying that multiplier to the financial measurement of the company whose value is being estimated. For example, if the average sold comparable had $1 million in EBITDA and sold for $10 million, the business is said to have sold for 10x EBITDA, and if a business being valued had $700,000 in EBITDA then the estimate of value would be $7 million ($700k x 10).

I see some buyers and their business brokers make a mistake in the application of this estimate of value, in a way that undervalues a business. Here's what happens: the business being valued has had strong growth over the past three years, so the business broker estimating value decides to average the past three years EBITDA, and then they apply the multiplier to that average.

The problem with this is that unless the business broker also uses a three-year average of each sold comparable business' EBITDA it results in an apples-to-oranges comparison. Most often when you can locate sold business comparable data from sold business databases you only see the most recent 12 months of financial data. So, for example, if a business had $1 million in EBITDA and sold for $10 million, the EBITDA multiplier would be 10. However, if that business had been growing at a 15% annual growth rate for the prior three years then the average three-year EBITDA would have been $875,236, not $1 million. If you divide the $10 million price by the three-year average EBITDA you would actually get an 11.43 multiplier, not a 10x.

So generally, when using a multiplier business brokers should be applying it to the most recent 12 months financial data, not a multi-year average.